Which is Better, Annuity or CD?

Dear Dr. Don,

Should I invest $100,000 in an immediate fixed-rate joint-life annuity at 5.6% or a five-year CD at 2.46%? The income is needed every month.

-- Michael Monetary

Dear Michael,

Well, it's likely you will get a whole lot more in monthly income out of the annuity than you will out of the certificate of deposit. Ask yourself, "How much income do I need from the investment, and how important is it for me to get my principal back?" A $100,000 five-year CD at 2.46% will throw off about $205 per month, but you get your $100,000 back when the CD matures.

How much monthly income the annuity pays depends on the joint life expectancy of the annuity holders, but that income is guaranteed for your lifetime. I input a scenario, assuming a husband and wife who are 65, into an immediate annuities calculator, and it resulted in a monthly income of $513 per month for a joint life annuity with no payments to a beneficiary. That monthly payment represents interest income and the return of principal over time.

Your annuity quote would vary from that number based on your joint life expectancy and the interest rate the insurance company used in developing the quote, which you state is 5.6% -- an attractive rate in today's low-interest environment.

Fixed-income annuities are best for people who are concerned about outliving their income. The downside is you are committing the money to the investment. Changing your mind is a very expensive proposition. Annuity surrender charges can be as high as 8% if you change your mind in the first year. The surrender charges decrease over time, but it's always better to take your time deciding on an annuity than it is to spend your time regretting the decision.

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